Eurozone drops into deflation, ECB prepares QE

In December 2014, the inflation rate in the eurozone dropped below zero for the first time since 2009. According to Eurostat, the inflation last month was -0.2%. Although prices in the majority of sectors remained largely stable, price drop in energies – by more than 6%, dragged the overall inflation well into the red. The drop in energy prices is linked to the falling oil price – last July it was traded at about $100 per barrel, now it is around $50 and still falling. The negative effect on inflation will therefore likely continue. Together with the modest economic growth (around 1% for the foreseeable future), prospects of a longer period of deflation become only too real. The ECB, whose mandate is to target the inflation to around 2%, has been very conservative in its steps until now, using some pro-inflation tools, but avoiding the large-scale quantitative easing the American Fed of the Japanese central bank used in the past – and which worked. Now, ECB President Mario Draghi indicated that the central bank of the eurozone is preparing “concrete measures” to tackle deflation. The next meeting of the Governing Council, the main decision-making body, is scheduled for 22 January. A QE program announcement is expected.

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